History of Money Series: When the Fed Took Rates to 20%

In the early 1980s, homebuilders started mailing two by fours to the Federal Reserve. Car dealers mailed in keys to cars nobody could finance. Farmers drove their tractors to Washington and parked them in a circle around the Fed building.

The chairman had a security detail and death threats. He was an economist.

In this episode of the History of Money series, Karl Eggerss goes back to 1979 through 1982, when Paul Volcker took interest rates to roughly 20 percent, pushed 30 year mortgage rates past 18 percent, and drove unemployment to levels this country had not seen since the Great Depression. On purpose.

Karl explains what made it necessary: Fifteen years of inflation that had stopped being a price problem and become a belief problem, where workers, businesses and consumers all started behaving as though prices would keep rising, which made it true. Killing that did not require changing the money supply. It required changing what a hundred and twenty million people expected.

It worked. Inflation went from about 15 percent to about 3, and it stayed there for forty years. The stock market bottomed in August of 1982 and began the greatest bull run of the century, three years after a famous magazine cover declared stocks dead.

But Karl does not tell it as a hero story. Millions lost jobs. Farm families lost land their grandparents had worked. The savings and loan crisis traces directly back to this period, and so does Latin America's lost decade. And economists still argue about whether it could have been done with far less pain.

Plus the takeaway most investors miss: Why a CD paying 15 percent in 1980 was a worse deal than one paying 2 percent today, and why the number on your statement has never been your actual return.